Author Topic: Are we holding too much in cash?  (Read 3742 times)

homeymomma

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Are we holding too much in cash?
« on: June 14, 2014, 11:49:08 AM »
Are we holding on to too much in cash?

I like to have savings for different things differentiated into separate accounts. Makes me feel organized and prevents me from thinking we have a 10K emergency fund, 10K medical fund, 10K house fund, and 10K car fund, when in reality we only have 10K.

Right now we have a 10K emergency fund sitting in an ING savings account. Equals about 6 months of basic expenses if unemployment were to hit (we are single income), or would cover any of our insurance deductibles in full (but not unemployment AND deductibles at the same time).
We're saving for a house purchase 3-7 years from now, which is currently going into a smarty pig account. (Just started, $1400/mo)
We are having a second baby in the fall, so all of our unspent budgeted money, plus the majority of our $400/mo "non-monthly expenses" budget (for things like car maintenance and the quarterly water bills) goes into yet another ING savings account to save for the $7500 put of pocket max we may reach with the delivery. Currently 2K, we add about 200/mo.

We only put a little over $1000 of our $4300 monthly take home into investments, all of which is labeled "retirement" and therefore untouchable.

The organized side of me wants to start yet another savings account for when our beater car kicks the bucket.

The investor side of me wants to invest everything but the 10K emergency fund and try to get our money to work for us a little bit more. We'd replenish the emergency fund as things cropped up... baby delivery, car, etc.

The actual amount of cash only totals about 16K right now, but will hopefully grow to close to 80K over the next three years of über-saving.

Help me decide, or find a happy middle ground?

nordlead

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Re: Are we holding too much in cash?
« Reply #1 on: June 14, 2014, 06:50:08 PM »
16k in cash isn't too much. 80k might be, but based on your goal of buying a house in the next 3-7 years, probably not. I'd only put the money in the stock market if you have no concrete goal with a timeframe of less than 10 years, but that isn't your case.

You could also combine some of your funds (slight increased risk). If you need 10k each for EF, medical, and car, combine them into one 20k fund. Odds are all 3 won't hit at the same time, and you can always buy a 4k car instead of a 10k car.

rmendpara

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Re: Are we holding too much in cash?
« Reply #2 on: June 14, 2014, 08:20:28 PM »
You should have two savings accounts:
1) Emergency savings - This is for unemployment, medical emergency, ransom money (I kid), etc. Basically, you should not touch this money unless an actual emergency comes up. Most sources will suggest 3-6 months of living expenses in cash, which you can adjust up or down based on your risk tolerance, other liquid assets which you could use if necessary, job stability, etc.
2) Specific savings - This is for an upcoming car purchase, home down payment, appliance/tv/whatever purchase, home improvements, etc. This account should only be used for these purposes, and not be commingled with #1.

$10k vs $16k isn't really a big difference. If an even bigger cushion helps you sleep at night, then go for it! At the end of the day, we all have different goals and needs. So maybe a good middle ground is $15k in emergency savings which you do not touch unless an actual emergency comes up. Then, open up a second account which you can slowly contribute to for a house purchase/car purchase/other stuff combined. If you end up putting a down payment on a home, then wait until you can rebuild to purchase the car or buy the new stove. In no case should you touch the emergency savings account. This forces you to be disciplined.

For the 2nd savings account, come up with a list of things that may come up in the next 5 years, come up with a target $ amount, divide by # of months, and start putting money away. Any remainder of your income after expenses should be invested.

There are many ways to get by on a smaller savings account balance, but given your modest income, it's probably best to keep a cushion and not cut it too close.

Hope this helps? Good luck with the home/baby/everything else!

Thegoblinchief

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Re: Are we holding too much in cash?
« Reply #3 on: June 16, 2014, 07:26:55 AM »
We have an e-fund as well as separate earmarked savings accounts. The earmarked accounts are considered "spent" money and don't figure in our NW calculations.

Currently we have house, car, kids expenses, travel, and finally his/her personal mad money accounts. I contribute to each a set percentage of net cashflow, instead of a set dollar amount, but that's because our income is somewhat variable while I still work (commission).

Edited to answer your question: no, I don't think that's too much cash at all, given your stated short term plans. I'd consider putting the house money into something higher yield, maybe a bond fund. There's some risk with bonds, but that way you're not losing to inflation.
« Last Edit: June 16, 2014, 07:28:33 AM by Thegoblinchief »

frugaliknowit

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Re: Are we holding too much in cash?
« Reply #4 on: June 16, 2014, 08:02:37 AM »
Are we holding on to too much in cash?

I like to have savings for different things differentiated into separate accounts. Makes me feel organized and prevents me from thinking we have a 10K emergency fund, 10K medical fund, 10K house fund, and 10K car fund, when in reality we only have 10K.

Right now we have a 10K emergency fund sitting in an ING savings account. Equals about 6 months of basic expenses if unemployment were to hit (we are single income), or would cover any of our insurance deductibles in full (but not unemployment AND deductibles at the same time).
We're saving for a house purchase 3-7 years from now, which is currently going into a smarty pig account. (Just started, $1400/mo)
We are having a second baby in the fall, so all of our unspent budgeted money, plus the majority of our $400/mo "non-monthly expenses" budget (for things like car maintenance and the quarterly water bills) goes into yet another ING savings account to save for the $7500 put of pocket max we may reach with the delivery. Currently 2K, we add about 200/mo.

We only put a little over $1000 of our $4300 monthly take home into investments, all of which is labeled "retirement" and therefore untouchable.

The organized side of me wants to start yet another savings account for when our beater car kicks the bucket.

The investor side of me wants to invest everything but the 10K emergency fund and try to get our money to work for us a little bit more. We'd replenish the emergency fund as things cropped up... baby delivery, car, etc.

The actual amount of cash only totals about 16K right now, but will hopefully grow to close to 80K over the next three years of über-saving.

Help me decide, or find a happy middle ground?

1)  10 k covers 6 months expenses, are you sure?  Sounds pretty light.
2)  Are you receiving a 401K match and are you maxing a Roth IRA?  If not, this should be a priority and a Roth can be used as part of your emergency fund if invested in no risk assets (preferably not).

Suggestion:  If you know the basics of Excel, you can avoid opening multiple bank accounts by creating sub accounts in Excel and tracking them in different columns (i.e. car replacement fund, house downpayment fund, etc.).

No, it does not sound like you are piling too much cash for your situation and goals.

soccerluvof4

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Re: Are we holding too much in cash?
« Reply #5 on: June 16, 2014, 08:14:53 AM »
We have an e-fund as well as separate earmarked savings accounts. The earmarked accounts are considered "spent" money and don't figure in our NW calculations.

Currently we have house, car, kids expenses, travel, and finally his/her personal mad money accounts. I contribute to each a set percentage of net cashflow, instead of a set dollar amount, but that's because our income is somewhat variable while I still work (commission).

Edited to answer your question: no, I don't think that's too much cash at all, given your stated short term plans. I'd consider putting the house money into something higher yield, maybe a bond fund. There's some risk with bonds, but that way you're not losing to inflation.



^+1 for the most part.

We basically have 2 cash/checking accounts. One is used ONLY for emergency's if need be and that amount is always the same.The other one is savings for things we know were going to be spending in the calender year.  We break that down in our tracking as to whats what. I also agree the second checking account since being spent shouldn't be part of your NW but that's a personal choice.

eccdogg

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Re: Are we holding too much in cash?
« Reply #6 on: June 16, 2014, 10:25:09 AM »
Once you have built up a decent stache, how much of an emergency fund do you really need? 

I am to the point where I have essentially one year's worth of salary in S&P 500 etf outside of 401k.  I could withstand a 50% drop and still have 6 mo. of expenses covered.  Is there any point of holding any cash above that necessary for monthly outflows once you have reached that point?

Credit cards can handle day to day cash management and I can get cash out of brokerage account in about 3-5 days.

This is a continual debate my wife and I have, she wants to hold more cash and I advocate to have more of it working for us.